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Water is the most important resource for sustainable agriculture in arid and semi-arid regions, where agriculture is the mainstay for rural societies. By relating the water usage to renewable water resources, we define three stages from sustainable to unsustainable water resources: (1) sustainable, where water use is matched by renewable water capacity, ensuring sustainable water resources; (2) transitional, where water use occasionally exceeds renewable water capacity; and (3) unsustainable, with lack of water resources for agriculture, society, and the environment. Using available drought indicators (standardized precipitation index (SPI) and streamflow drought index (SDI)) and two new indices for agricultural drought (overall agricultural drought index (OADI) and agricultural drought index (ADI)), we evaluated these stages using the example of Fars province in southern Iran in the period 1977–2016. A hyper-arid climate prevailed for an average of 32% of the province’s spatio-temporal coverage during the study period. The area increased significantly from 30.6% in the first decade (1977–1986) to 44.4% in the last (2006–2015). The spatiotemporal distribution of meteorological drought showed no significant negative trends in annual precipitation during 1977–2016, but the occurrence of hydrological droughts increased significantly in the period 1997–2016. The expansion of irrigated area, with more than 60% of rainfed agriculture replaced by irrigated agriculture (especially between 1997 and 2006), exerted substantial pressure on surface water and groundwater resources. Together, climate change, reduced river flow, and significant declines in groundwater level in major aquifers led to unsustainable use of water resources, a considerable reduction in irrigated area, and unsustainability in agricultural production in the period 2006–2015. Analysis of causes and effects of meteorological, hydrological, and agricultural drought in the area identified three clear stages: before 1997 being sustainable, 1997–2006 being transitional, and after 2006 being unsustainable.